Question

In: Finance

QUESTION 17 TPG Inc. is evaluating an investment project that lasts for four years. The project...

QUESTION 17

  1. TPG Inc. is evaluating an investment project that lasts for four years. The project has the cost of capital of 15% and requires an initial investment of $5 million today. The size of the annual cash flows will depend on future market conditions. There is a 30% probability that the market conditions will be good, in which case the project will generate free cash flows of $4 million per year during the next four years. There is also a 70% that the market conditions will be bad, in which case the project will only generate free cash flows of $0.5 million per year for the next four years. While TPG is fairly confident about its cash flow forecast, it recognizes that it will have more information about the market conditions if it delays its investment in the project until next year. This delay also means that the firm will give up one year of positive free cash flows. However, if market conditions are good, the firm will proceed with the investment project; if market conditions are bad, the firm will not proceed with the investment project. The firm estimates that the net present value (NPV) of the project without the option to delay and the NPV of the project with the option to delay would be closest to:

    A.

    The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $3.59 million
    B.

    The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $1.08 million
    C.

    The NPV of the project without the option to delay is - $0.57 million and the NPV of the project with the option to delay is $6.42 million
    D.

    The NPV of the project without the option to delay is -$0.57 million and the NPV of the project with the option to delay is $1.08 million

Solutions

Expert Solution

Expected cash flow = probability of success * Cash flow in success + probability of Failur * Cash flow in Failure = $1.55 Million

Option A The NPV of the project without the option to delay is -$3.57 million and the NPV of the project with the option to delay is $3.59 million

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

TPG Inc. is evaluating an investment project that lasts for four years. The project has the...
TPG Inc. is evaluating an investment project that lasts for four years. The project has the cost of capital of 10% and requires an initial investment of $4 million today. The size of the annual cash flows will depend on future market conditions. There is a 40% probability that the market conditions will be good, in which case the project will generate free cash flows of $3 million per year during the next four years. There is also a 60%...
QUESTION 10 ABC Inc. is evaluating an investment project that lasts for three years. The project...
QUESTION 10 ABC Inc. is evaluating an investment project that lasts for three years. The project has the cost of capital of 10% and requires an initial investment of $3 million. There is a 60% chance that the project would be successful and would generate annual free cash flows of $2 million per year during the next three years. There is a 40% chance that the project would be less successful and would generate only $1 million per year during...
A project manager is evaluating a project and initially forecasts that the project will lasts for...
A project manager is evaluating a project and initially forecasts that the project will lasts for four years and has its annual marketing and support costs of $1,000,000 and its annual revenue of $10,000,000. The project pays a 40% tax rate on its pre-tax income and its cost of capital is 15%. While analysing a situation that competitors can run their big promotion programs during the project’s life, the manager proposes one solution to the situation by increasing the marketing...
A project manager is evaluating a project and initially forecasts that the project will lasts for...
A project manager is evaluating a project and initially forecasts that the project will lasts for four years and has its annual marketing and support costs of $1,000,000 and its annual revenue of $10,000,000. The project pays a 40% tax rate on its pre-tax income and its cost of capital is 15%. While analysing a situation that competitors can run their big promotion programs during the project’s life, the manager proposes one solution to the situation by increasing the marketing...
Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for...
Ace Inc. is evaluating two mutually exclusive projects—Project A and Project B. The initial investment for each project is $40,000. Project A will generate cash inflows equal to $15,625 at the end of each of the next five years; Project B will generate only one cash inflow in the amount of $79,500 at the end of the fifth year (i.e., no cash flows are generated in the first four years). The required rate of return of Ace Inc. is 10...
Carlson Inc. is evaluating a project in India that would require a $6.2 million investment today...
Carlson Inc. is evaluating a project in India that would require a $6.2 million investment today (t = 0). The after-tax cash flows would depend on whether India imposes a new property tax. There is a 50-50 chance that the tax will pass, in which case the project will produce after-tax cash flows of $1,350,000 at the end of each of the next 5 years. If the tax doesn't pass, the after-tax cash flows will be $2,000,000 for 5 years....
A proposed investment has a project life of four years. The necessary equipment will cost of...
A proposed investment has a project life of four years. The necessary equipment will cost of $1,200, and have a useful life of 4 years. The cost will be depreciated straight-line to a zero salvage value, but will have a market worth $500 at the end of the project’s life. Cash sales will be $2,190 per year for four years and cash costs will run $670 per year. Fixed cost is $176 per year. The firm will also need to...
Atlantic Manufacturing is considering a new investment project that will last for four years. The delivered...
Atlantic Manufacturing is considering a new investment project that will last for four years. The delivered and installed cost of the machine needed for the project is $23577 and it will be depreciated according to the three-year MACRS schedule. The project also requires an initial increase in net working capital of $293. Financial projections for sales and costs are in the table below. In addition, since sales are expected to fluctuate, NWC requirements will also fluctuate. The end-of-year NWC requirements...
Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost...
Assume a machine costs $404,000 and lasts four years before it is replaced. The operating cost is $47,000 a year. Ignore taxes. What is the equivalent annual cost if the required rate of return is 12.5 percent? (Hint: the EAC should account for both initial investment and annual operating costs) $163,297 $174,825 $181,414 $195,637 $202,118
Initial Cash flow investment Project A $5 million $2 million per year for four years Project...
Initial Cash flow investment Project A $5 million $2 million per year for four years Project B $3 million $1 million per year for five years Project C $2 million $1 million per year for four years Project D $3 million $1.5 million per year for three years An investor has a budget of $5 million. He can invest in the projects shown above. If the cost of capital is 6%, what investment or investments should he make? Select one:...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT